July 21: State-level legal lending changes – they keep coming; AI, blockchain, and cyberattacks

There are countless bits of trivia about the United States. For example, there are two U.S. states where the temperature has never surpassed 100 degrees Fahrenheit: Alaska and Hawaii. I play catch-up on some state-level lending law changes below. Although there was plenty of griping about national-level rules and regulations, when you have 50 states with varying takes on things like notaries, signatures, documents, real property law, and licensing, it just makes things more difficult. But first…

Blockchain, technology, and cybercriminals – two steps forward, one step back

Bank of Canada’s senior researcher said blockchain does not currently have the cost-savings expected compared to a central banking system and still has the vulnerabilities of hacking and operational risks.

The CEO of one of the most technologically advanced banks in the world, BBVA, stated concerns about current blockchain technology. He noted things such as volatility of associated currencies and potential problems with tax and financial authorities’ systems. However, he noted that when this technology has resolved these challenges and regulators accept it, he is ready to use it.

And Wells Fargo joins Citigroup, JPMorgan, Bank of America and US Bank, as it prohibits customers from using credit cards to buy cryptocurrencies. According to a LendEDU survey, approximately 22% of bitcoin investors could not pay off their credit card balance after purchasing bitcoins.

Think about the term “artificial intelligence” for a moment. Fake. The intelligence of machines is what is generally known as artificial intelligence (AI) or machine learning (ML). AI and ML are all the rage right now and the biggest banks, and some non-depository lenders, are actively embracing these technologies for everything from customer service assistance to compliance. Many banks have been especially successfully at employing AI in their efforts to identify suspicious activities and transactions for BSA/AML.

However, a recent experiment found cybercriminals would be significantly more successful in their phishing efforts, if they were to start using AI. This experiment was conducted by scientists at security company, Cyxtera, to determine how AI could potentially be used to help cybercriminals perfect their phishing attacks.

According to “DeepPhish: Simulating Malicious AI,” a paper documenting the results of the experiment, bank systems that currently utilize AI to identify and fend off cybercrime are successful 99% of the time. But, when scientists applied AI to cybercriminals’ side of the equation, things changed. By using AI to generate synthetic phishing URLs, scientists were able to successfully circumvent security systems designed to flag false URLs 21% and 36% of the time vs. previous success rates of less than 1% and 5%, respectively.

Ignoring such findings could mean millions of dollars of losses for banks. According to last year’s “Cost of Cyber Crime Study” produced by Accenture and the Ponemon Institute, security breaches within the financial services industry cost attacked organizations an average of $18mm annually.

Though the efforts of cybercriminals aided by AI and ML will make IT efforts to secure sensitive information notably harder, there are lessons to be learned from these findings. The most important lesson is the fact that AI has the capacity to learn and evolve. That means anti-fraud security programs, incorporating AI and ML, should be consistently updated and re-trained using the latest data available. In the case of this experiment, scientists accomplished this by teaching existing anti-fraud systems to interpret URL creation strategies, which allowed these anti-fraud programs to identify existing patterns and recognize any new patterns created by potential fraudsters using AI.

Steve Brown with PCBB writes, “Given that AI and ML are now pretty available to everyone, it is only a matter of time until cybercriminals begin using these tools to enhance their endeavors to compromise financial information.”

State-level lending and policy changes

In the United States, four states are also referred to as commonwealths aside from its associated territories which include Puerto Rico and the Northern Mariana Islands which are also called commonwealths. The four states which are officially called commonwealths are Pennsylvania, Kentucky, Virginia, and Massachusetts. Did you know that Alaska, Hawaii, Maine, and Vermont are the only states that prohibit billboards? I snagged that legal note from economist Elliott Eisenberg. On to things a little less interesting, but more important to lenders.

Vermont Department of Financial Regulation, Banking Division, adopted provisions relating to Regulation B-2018-01 regarding privacy of consumer financial and health information replacing Regulation B-2015-02 and is effective immediately. It directs the handling of nonpublic personal information about consumers by financial institutions. “This regulation: Requires a financial institution to provide notice to individuals about its privacy policies and practices; (2) Describes the conditions under which a financial institution may disclose nonpublic personal information about consumers to nonaffiliated third parties; (3) Requires financial institutions to obtain consumer consent prior to disclosing that information, subject to the exceptions in Sections 14, 15, 16 and 17 of this regulation and 8 V.S.A. § 10204 and subject to the federal Fair Credit Reporting Act and Vermont Fair Credit Reporting Act; and, (4) Provides an exemption from the provisions of 8 V.S.A. §§ 10201 et seq. for information about business customers.” Full text is available here.

Florida House Bill 639 relating to the equitable distribution of marital assets and liabilities in the event of a dissolution of marriage will become effective on July 1, 2018. This Bill establishes a more definitive statutory formula to calculate the marital portion of passive appreciation of a nonmarital asset that is subject to equitable distribution using methodology similar to the case law but uses the amount of mortgage principal paid down during the marriage instead of the amount of the mortgage at the time of marriage. The new bill modifies the current method for determining this valuation. Under current law, a method for determining the marital portion of passive appreciation that is subject to equitable distribution has been established by case law as dividing the amount of the mortgage at the time of marriage by the fair market value of the asset at the same time and multiplying that fraction by the amount of passive appreciation during the marriage. The bill also allows a party to argue that use of the formula would be inequitable under the facts of a specific case.

The Washington Department of Licensing adopted provisions relating to notaries that include replacing all existing sections as well as adding new sections to Chapter 308-30 of the Washington Administrative Code to implement the provisions of the Revised Uniform Law on Notarial Acts. A notary public appointment will now be called a “notary public commission”. To apply for a notary public commission, an applicant must submit the application on forms provided by the Department. Once approved by the Department, it will issue the commission or endorsement upon the applicant’s fulfillment of the requirements for a notary public commission or an electronic records notary public endorsement. Specific requirements are outlined for a notary who has received an electronic records notary public endorsement, requirements for the journal of notarial acts, fee requirements, replacement of lost or stolen official seal or stamp and change of name and address, termination or suspension of commission or endorsement.

The state of North Carolina has recently enacted House Bill 852, which makes changes to various real property statutes and regulates the solicitation fees for copies of documents recorded. Section 1.1 clarifies that in a purchase-money mortgage transaction, the buyer’s spouse is not required to sign the mortgage instrument or deed of trust regardless of whether the secured party is the seller or a third-party lender. Section 1.2 clarifies the fee for recording subsequent instruments related to mortgages or deeds of trust. Section 2.1 of the bill clarifies that requiring the drafter’s name on the first page of an instrument as a requirement for recording applies only to a deed or deed of trust. This section also adds language requiring the register of deeds to accept written representations regarding the licensing status of the attorney who drafted the deed or deed of trust. Section 2.2 adds additional corporate officials whose signatures, when appearing on the face of instruments recorded in the register of deeds, are deemed as valid as if authorized directly by a board of directors. This section clarifies that the statute applies to limited liability companies and makes other technical changes. 3.1 regulates any person, firm, or corporation soliciting a fee in exchange for providing a copy of a record available at the register of deeds office. In addition, provisions regarding the notice of foreclosure sale cancellations have also been added.

On June 25, the New York governor announced the issuance by the New York Department of Financial Services (NYDFS) of a final regulation that requires consumer credit reporting agencies (CRAs) with significant operations in New York to register with NYDFS and to comply with New York’s cybersecurity standard. Specifically, the newly promulgated regulation, entitled “Registration Requirements & Prohibited Practices for Credit Reporting Agencies,” 23 NYCRR 201, requires CRAs that reported on 1,000 or more New York consumers in the preceding year to register annually with NYDFS, beginning on or before September 1, 2018 for 2017 reporting, and by February 1 for every year thereafter. The regulation authorizes the NYDFS superintendent to refuse to renew a CRA’s registration for various reasons, including if the applicant or affiliate of the applicant fails to comply with the cybersecurity regulations; subjects the CRAs to examination by NYDFS at the superintendent’s discretion; and prohibits CRAs from engaging in any “unfair, deceptive, or predatory act or practice toward any consumer,” to the extent not preempted by federal law. Additionally, beginning on November 1, the regulation requires every CRA to comply with NYDFS’ cybersecurity regulation, which requires, among other things, covered entities have a cybersecurity program designed to protect consumers’ data and controls and plans to help ensure the safety and soundness of New York’s financial services industry.

Nebraska modified its provisions relating to real property and the recording of instruments and the rights and duties of secured creditors with respect to the Residential Mortgage Licensing Act effective on July 17, 2018. A “licensee licensed as a mortgage banker shall record or cause to be recorded a release of mortgage or in the case of a trust deed, record or cause to be recorded a reconveyance.” “The transfer of any debt secured by a mortgage shall also operate as a transfer of the security of such debt.” “Section 76-2803 shall govern a mortgagee’s obligation to record or cause to be recorded a release of mortgage and the liability of the mortgagee for failure to timely record or cause to be recorded a release of mortgage.” Section 4 also provides that the “beneficiary’s obligation to record or cause to be recorded a deed of reconveyance and the liability of the beneficiary for failure to timely record or cause to be recorded a deed of reconveyance shall be governed by Section 76-2803.” Section 5 provides that a secured creditor “shall record or cause to be recorded, a deed of reconveyance or a release satisfaction of a mortgage or other security instrument, as applicable,  in the real property records of each county in which the trust deed, mortgage, or other security instrument is recorded after receiving a full payment or performance of the secured obligation and a written request by the trustor, mortgagor, or grantor, or the trustor’s, mortgagor’s, or grantor’s successor in interest or designated representative or by the holder of a junior trust deed, junior mortgage, or other junior security interest.”

The Commonwealth of Kentucky amended its provisions relating to contracts; when parties are bound to the interest rate in a contract and the interest rate parties are entitled to receive after default effective July 12, 2018. A new section of Kentucky Revised Statutes Chapter 371 is created as part of these amendments. This new section states that the obligation of an obligor to pay a debt is not extinguished by any action taken by an obligee; an obligee has the right to maintain its own records and may consider the obligation as not collectible, but this will not remove the obligation from the obligor’s responsibilities. The obligor maintains the right to prove that it has fully or partially paid the obligation in accordance with the terms of the agreement.

Three men were sitting and loitering on a park bench.

The one in the middle was reading a newspaper.

The others were pretending to fish. They baited imaginary hooks, cast lines, and reeled in their catch.

A passing policeman stopped to watch the spectacle and asked the man in the middle if he knew the other two.

“Oh yes,” he said. “They‘re my friends.”

“In that case,” warned the officer, “you’d better get them out of here – they’re crazy!”

“Yes, sir,” the man replied, and he began rowing furiously.

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Rob Chrisman